This year promises many important developments with respect to the U.S. Environmental Protection Agency’s implementation and enforcement of the federal Clean Air Act.  Here are some major enforcement trends and regulatory issues that regulated parties may want to monitor in 2014.

Air Enforcement:  Five Things to Watch as EPA’s Old Priorities Confront New Realities

The U.S. Environmental Protection Agency’s (EPA) national air enforcement priorities for 2014 are the same as last year’s—the focus is on reducing emissions from coal-fired power plants, major industrial operations and oil and gas exploration.  But the agency has less money, has suffered some important legal defeats, especially with regard to new source review (NSR) enforcement, and is still grappling with the implications of Sackett v. EPA, a 2012 United States Supreme Court decision that upended the agency’s understanding of when its actions are subject to judicial review.  As EPA adjusts to its new budgetary and legal circumstances, regulated parties should closely monitor the following five enforcement-related developments:

1.  Notices of Violation—Can They Now Be Challenged in Court?

EPA has long argued that its notices of violation (NOVs) are not “final” actions subject to judicial review.  But the Supreme Court’s decision in Sackett v. EPA, 132 S. Ct. 1367 (2012), has cast some doubt on the agency’s position and the U.S. Court of Appeals for the Fifth Circuit is expected to address the finality of Clean Air Act NOVs later this year in Luminant Generation Company, L.L.C. v. EPA, No. 12-60694.  In these circumstances, companies receiving an NOV should carefully consider whether the NOV qualifies as “final” under the test described in Sackett and Bennett v. Spear, 520 U.S. 154 (1997), and should carefully evaluate the pros and cons of filing a judicial challenge to the NOV.

2.  “Next Gen” Compliance—What Does it Mean as a Practical Matter?

EPA’s Next Generation Compliance initiative seeks to promote environmental compliance through four principal measures:  simpler regulations, featuring built-in compliance incentives and fewer exceptions; advanced monitoring devices; electronic data reporting; and greater disclosure of environmental data to the general public.  From an air enforcement perspective, the most important current development is that EPA is increasingly using new monitoring technologies—such as infrared cameras—to identify potential air violations.

Infrared cameras can detect otherwise invisible emissions from storage vessels and process equipment, as well as insufficient combustion at pollution control flares.  But those hidden emissions do not necessarily constitute a violation, even when EPA casts them as evidence of a failure to comply with a “general duty” to follow good engineering practices and to minimize air emissions.  Companies accused of regulatory violations based on EPA’s use of new monitoring devices should consult counsel about the potential defenses to such allegations—the defenses are often quite strong.  But they should also be aware that the new devices often detect leaking product, which means that working with EPA to fix the alleged problems can often be beneficial, whether or not EPA can prove a violation.  Companies facing enforcement actions can also sometimes reduce their penalties by agreeing to install advanced monitoring technologies as part of a settlement, although any company that goes that route should be careful to understand exactly how the resulting data will be used to measure compliance going forward.

3.  Administrative Settlements—They Become More Attractive in Times of Budget Cuts

EPA generally has a choice whether to resolve its enforcement actions in a judicial consent decree or in an administrative settlement agreement.  Consent decrees take more work, which means that in an era of reduced resources, EPA will be increasingly tempted to resolve its enforcement matters administratively.  That development presents a good opportunity for some targets of EPA investigations.  Companies that make an early administrative settlement offer may be able to obtain a more favorable outcome than would otherwise be available.  But it is important to understand the limits on EPA’s administrative settlement authority, some of which are statutory and some of which stem from EPA’s internal system of delegating authority.  Experienced counsel can help identify the applicable limits, as well as options for overcoming them in specific cases.

4.  Other Plaintiffs—Watch Out for Sierra Club and Private Parties

As EPA reduces it enforcement presence (not simply in the air realm, but across all regulatory programs), some companies may be lulled into paying less attention to compliance.  But risks remain for companies that fail to take their compliance obligations seriously.  Federal enforcement is not so much going to disappear as it is going to become less uniform and less predictable, and regulated parties are required to comply with the law regardless of how vigorous enforcement may be in any given year.  In addition, as EPA cuts back, other plaintiffs, such as Sierra Club, may become more aggressive.  This coming year may also see an increase in the filing of common law tort claims against large emitting facilities because those claims got a boost last summer from the U.S. Court of Appeals for the Third Circuit’s decision in Bell v. Cheswick Generating Station.  Companies facing such third-party enforcement actions can take some comfort in knowing that they are often subject to strong threshold legal defenses.

5.  NSR Enforcement—Despite the Rumors, It Is Not Dead Yet

EPA lost two highly significant NSR appellate cases in 2013: United States v. EME Homer City Generation, L.P., 727 F.3d 274 (3rd Cir. 2013) and United States v. Midwest Generation, LLC, 720 F.3d 644 (7th Cir. 2013).  But the agency also obtained some favorable NSR settlements and achieved an important victory in United States v. Alabama Power Co., 730 F.3d 1278 (11th Cir. 2013).  That mixed record, combined with EPA’s budget cuts, suggests that the agency will continue pursuing its existing NSR enforcement matters but will hesitate to commence new matters.  The outcome of the existing matters is likely to determine how aggressive EPA will be about NSR enforcement in future years.

Because the NSR case law is still evolving, companies that are considering equipment replacement projects (or that are looking to buy or sell older facilities) should consult counsel about how they might be affected by NSR.  At the same time, there are some general themes worth remembering:

• Selling an Old Facility Is a Good Way to Protect Against NSR Liability for Past Modifications, But Not Necessarily in Every Jurisdiction.  A primary lesson of the Homer City and Midwest Generation cases is that the best way to protect oneself against NSR liability is to sell one’s facility.  Those cases hold, in essence, that where a modified (but unpermitted) facility has been sold and the statute of limitations has expired, neither the prior owner nor the current owner can be held liable for violating NSR.  But the decisions do not apply in all jurisdictions, and their outcomes depend in part on factual and legal details that may not be present in other cases.  Regulated parties should carefully compare their circumstances to the circumstances of the defendants in Homer City and Midwest Generation before concluding that they are protected by the holdings of those cases.

• If You Modified an Old Facility and Still Own It, You May Still Be Found Liable for NSR Violations, Even After Expiration of the Statute of Limitations.  Some NSR defendants have resisted that conclusion, but in Homer City the Third Circuit concluded that where the statute of limitations has expired and ownership has not changed hands, EPA “can still obtain an injunction requiring the owner or operator to comply with the PSD [prevention of significant deterioration] requirements.”

• Two Pending Cases Are Especially Relevant to Implementation and Enforcement of the Post-2002 NSR Regulations.  Most of EPA’s NSR cases have involved pre-2002 versions of the NSR regulations, but two pending cases promise to address the meaning, applicability and enforceability of the post-2002 rules:  United States v. DTE Energy Co., No. 10-cv-13101 (E.D. Mich.) and United States v. Oklahoma Gas & Elec. Co., No. 13-cv-560 (W.D. Ok.).  Those cases may produce rulings about how companies are supposed to predict their future emissions and what options may exist for “managing” emissions after a project has been completed.  Regulated parties should also be aware that EPA may become more aggressive about investigating planned equipment upgrades rather than focusing on past projects.  In Homer City, the Third Circuit all but encouraged such investigations.

• For Older Power Plants, the Title V Permit Renewal Process May Become the New NSR Battleground.   EPA and other NSR plaintiffs often bring Title V claims along with their NSR claims.  But in Homer City, the Third Circuit held, on the specific facts of that case, that EPA was precluded from alleging that the defendants had defective Title V permits because the agency had failed to object to those permits at the time they were issued.  The Third Circuit’s holding encourages EPA to become more aggressive about reviewing a facility’s NSR compliance at the time that facility seeks a renewed Title V permit.

Air Regulations:  It Is Not Just About Carbon

Carbon regulations are at the top of everyone’s agenda—EPA is in the midst of proposing greenhouse gas emission limits for power plants and the Supreme Court is currently considering a challenge to the agency’s existing greenhouse gas permitting rules.  But 2014 also promises many important developments with respect to other high profile topics.

1.  Interstate Air Pollution—Upwind Coal Plants Will Face Increasing Pressure to Reduce Emissions, With or Without CSAPR

The Supreme Court will decide the fate of EPA’s Cross-State Air Pollution Rule (CSPAR) later this spring.  But whatever may happen with that rule, downwind states will continue to look for ways to force upwind power plants to reduce their sulfur dioxide and nitrogen oxide emissions.  Nothing illustrates that point more powerfully than the petition that eight eastern states filed in December 2013, the day before the CSAPR oral argument, urging EPA to expand the Clean Air Act’s Ozone Transport Region to include nine additional states.  The petition confirms that even if CSAPR is reinstated, downwind states will be pushing for even further upwind emissions reductions.  Those states’ efforts will likely be all the more intensive if CSAPR is not reinstated.

One tool that downwind states may use is asking EPA to impose facility-specific emission limits in upwind states.  In 2010, New Jersey petitioned EPA to impose such limits on a Pennsylvania power plant, and the agency subsequently granted that petition.  Last summer, in GenOn Rema, LLC v. EPA, the Third Circuit upheld EPA’s actions.  That decision may prompt other states to follow New Jersey’s example.  Companies facing such petitions need to understand the legal and technical issues they raise and should consult counsel about the best means of responding to them.

2.  Startups, Shutdowns and Malfunctions—Major Legal Battles are on the Horizon

Many federally-enforceable air regulations contain “affirmative defense” provisions, provisions that either excuse compliance during startup, shutdown and malfunction (SSM) events or that protect the regulated party from paying civil penalties for any violations that occur during an SSM event.  That situation may soon change.

In February 2013, EPA proposed a major overhaul of the SSM affirmative defense provisions in roughly forty Clean Air Act state implementation plans.  EPA’s proposal, which is expected to be finalized by June 2014, would allow affirmative defenses, but only for civil penalties (not injunctive relief) and only for unplanned and unforeseeable malfunctions; affirmative defenses would not be available for violations that occur during planned startups and shutdowns or during reasonably foreseeable malfunction events.

EPA’s proposed rule mirrors the approach that was approved last year for the Texas state implementation plan in Luminant Generation Co. LLC v. EPA, 714 F.3d 841 (5th Cir. 2013).  But the legal battle over SSM-related affirmative defenses is not finished.  Various industry groups and states will almost certainly challenge EPA’s SSM rule once it is finalized.  And Sierra Club continues to press forward with its argument that the Clean Air Act does not authorize affirmative defenses at all.  The Fifth Circuit largely ignored Sierra Club’s theory in theLuminant case, but that theory received a more favorable reception from the U.S. Court of Appeals District of Columbia (D.C.) Circuit at oral argument last October in Sierra Club v. EPA, No. 10-1371.  If the D.C. Circuit reaches a different conclusion with respect to affirmative defenses than the Fifth Circuit, that would create the possibility of Supreme Court review.

3.  Fracking—Two Controversies Worth Monitoring

EPA’s current air regulations for oil and gas drilling do not directly regulate methane emissions; instead, they regulate emissions of volatile organic compounds.  That aspect of the regulations has been controversial, prompting at least one lawsuit by environmental organizations and the threat of a second lawsuit by a coalition of states.  But even without those legal threats, the pressure is growing on EPA to do something about methane leaks from the natural gas production process.  A September 2013 University of Texas study revealed that although EPA’s required pollution control technologies are quite effective at capturing methane leaks from fracking wellheads, other drilling-related equipment is leaking methane at much higher rates than previously estimated.  Studies like that increase the likelihood that EPA will modify its regulations to require methane capture at various points in the drilling process.

Regulated parties may also want to monitor EPA’s approach to “aggregating” drilling operations for NSR permitting purposes.  The U.S. Court of Appeals for the Sixth Circuit rejected EPA’s current approach to aggregation in 2012 in Summit Petroleum Corp. v. EPA, but EPA has so far refused to follow that decision in other jurisdictions, prompting additional litigation against EPA over that topic.

4.  Carbon Regulations—What Are EPA and the Supreme Court Going to Do?

EPA published proposed greenhouse gas emission limits for new coal- and gas-fired power plants in early January 2014 and is expected to propose corresponding emissions guidelines for existing power plants by no later than June 2014.  Both proposals are likely to encounter strong opposition and will almost certainly result in litigation once they are finalized.  The principal legal dispute with respect to new power plants is whether EPA’s proposed emission limits for coal plants (which are based on the partial use of carbon capture and sequestration technologies) are based on an emission reduction system that has been “adequately demonstrated” within the meaning of Clean Air Act Section 111.  The legal issues with respect to existing power plants are more complicated, but three topics are especially important:  Does EPA have the authority to use Section 111(d) in the first place?  Assuming it has that authority, must the 111(d) emission guidelines be based solely on “inside the fence” emission reduction measures (such as retrofits), or can they be based on “outside the fence” measures such as state-level energy efficiency programs?  And how should EPA handle existing state-level greenhouse gas regulations, such as the carbon trading program administered by the Regional Greenhouse Gas Initiative?

While EPA grapples with those issues, the Supreme Court is reviewing EPA’s current greenhouse gas permitting regulations in Utility Air Regulatory Group v. EPA, No. 12-1146.  The question on everyone’s mind is whether a Supreme Court decision rejecting EPA’s current permitting rules will mean that EPA cannot proceed with its planned Section 111 regulations for power plants.

We will not know the answer until we see the Court’s final opinion—everything depends on the precise holding and rationale of that opinion.  Based on the different statutory interpretations advanced by the parties challenging EPA’s permitting rules, it appears that the Court could easily issue an opinion rejecting those rules, while nevertheless leaving the agency’s Section 111 regulatory authority fully intact.  Conversely, the Court could also sharply curtail EPA’s Section 111 authority, although doing so would likely require the Court to either limit or overturn its prior decisions in Massachusetts v. EPA and American Elec. Power Co. v. Connecticut.  The latter outcome seems less likely than the first, partly because of the power of stare decisis in statutory cases, but no one can be certain what the Supreme Court will do until the Court actually issues its decision.  In the interim, EPA will continue working on its proposed rules, and interested parties should actively participate in those rulemakings.